TUTORIAL - CHAPTER 5

Mr. Brown is a chief executive for a Multinational company situated in Malaysia. As a chief executive with multi-million-dollar pay packets, Mr. Brown is not necessarily working in the best interests of shareholders and, thus there may be a situation to limit his pay. The board of directors of the company had a meeting to discuss whether limits on Mr. Brown pay will hurt or benefits shareholders. This is because Mr. Brown managed to report higher earnings in the year 2017 to 2018 by 30%. During the meeting, Mr. Clark suggest to provide Mr. Brown with $5 million bonuses to encourage the CEO to make effective decision for the best interest of shareholders. Whereby, Mr. Kirk who is also the board of director of the company, against the suggestion because he contended that Mr. Brown, the CEO will have the tendency to make short-term decisions rather than working closely with the board of directors and make the decision in the best interest of shareholders.

Furthermore, according to Ms. Shirley, who is also the audit committee members on the board, explained that for the past 5 years, Mr. Brown compensation has been increasing in order to improve the company position and performance. However, Mr. Brown performance as the company CEO, cannot be measured appropriately with the company's share value. Ms. Shirley highlighted that Mr. Brown occasionally refer to the board of directors and/or other board committee to discuss on significant actions and decisions for the company's material economic decisions. Not much of the company significant economic decisions have been discussed with the board of directors or other relevant committee for consideration. There are also cases whereby the audit committee had already informed Mr. Brown to give priority on the earnings distributed to the shareholders as dividend. However, the increases of share dividend are quite trivial for 2018.

During the discussion, Ms. Shirley also informed that in the year 2018, a financial report has been presented to the board of directors. The report shows that there are three major streams of revenue: concert sales, sponsorship and government funding. For the year ended 30 June 2018, these revenues were about $2.7 million, $1.4 million, and $8.9 million respectively. Ms. Shirley explained that the company's expenses are largely fixed, even before the start of the season. For the purpose of the event all associated cost are set in advance. The main uncertainties about the success of a season concern the subscription and door sales revenue from its concert. As the 2019 financial year starts half-way through the concert season, the result for the first half of the financial year is nearly unalterable, and that for the second half depends largely on the attractiveness of the next season to subscribe and sponsors. For this reason, the company has little to manage earnings, either by making discretionary accruals or by structuring real transactions in the short term. However, Mr. Brown did not make any proposal on the techniques that the company can consider. This issue has becoming another factor in considering Mr. Brown's accountability when preparing the accounting information and to presented to the board of directors. The board of directors' concern on the techniques to be used to manage the earning and that could be either ethical or unethical from the shareholders' perspectives. This is because the audit committee has important role in detecting/limiting excessive earnings management if such case occurred.

1. Discuss TWO (2) accounting theory that can relate and explain about Mr. Brown case in executing his role as the company's chief executive director. (*Hint: you may look at the various issues found in the case and explain)